CAGR (Compound Annual Growth Rate)

CAGR, or Compound Annual Growth Rate, answers the question: what constant annual return, compounded every year, would have produced this investment's actual starting and ending value? It smooths all of the year-to-year ups and downs into one representative number.

CAGR is calculated as (Ending Value / Starting Value) raised to the power of (1 / number of years), minus 1. It is a more accurate way to describe long-term growth than a simple average of annual returns, because compounding is multiplicative, not additive. A portfolio that gains 50% one year and loses 50% the next has an average annual return of 0%, but its actual CAGR over those two years is negative, since a 50% loss requires a 100% gain just to break even. This gap between average returns and compound returns — sometimes called volatility drag — grows wider as a strategy becomes more volatile.

Because CAGR looks only at the starting and ending values, it hides all of the volatility that happened in between. Two portfolios can have an identical CAGR over 20 years while one had a much smoother ride and the other suffered brutal multi-year drawdowns along the way. That is exactly why this site reports max drawdown, volatility, Sharpe, and Sortino alongside CAGR for every strategy.

One more distinction matters: a CAGR can be quoted in nominal terms (before inflation) or real terms (after inflation). A 9% nominal CAGR during a decade of 3% inflation is really about 6% of genuine purchasing-power growth. When comparing strategies across different eras, always check whether the growth rates are nominal or real.